Small Businesses Cautious About Arbitration

May 19, 2005--Despite their attractiveness as an alternative to the high costs of employment litigation and runaway jury verdicts, mandatory arbitration agreements are still a long way from becoming a viable tool for small businesses.

Without the legal resources to draw up arbitration agreements that are fair to everyone and will stand the scrutiny of the courts, small businesses have been slow to adopt them.

"Small businesses have been very cautious towards arbitration agreements. The trend right now is very slow and is likely to remain for the next five to 10 years until the courts work out the various issues surrounding arbitration agreements," said Robert Edmund, a lawyer with Porter Wright Morris & Arthur LLP.

An informal survey by the National Federation of Independent Businesses (NFIB) has indicated that most of its members do not currently use arbitration agreements.

However, mandatory arbitration agreements can be a very effective tool for small businesses as they minimize the risk of a single case with a runaway verdict that could sink a small business with limited resources, said Edmund.

"A lot of employers fear that and there are reports to justify those fears. But mandatory arbitration agreements can be effective only if they don't overreach," he said.

In the last few years there have been a number of cases that challenge mandatory arbitration agreements drawn up by employers.

The latest has been the case of Walker v. Ryan's Family Steak Houses Inc. The U.S. 6th District Court in a ruling passed in March said that the arbitration agreement of the employer was unenforceable as it curtailed the rights of the employees, especially in terms of choice of the arbiter and the ability of the employee to get access to information.

Employers, especially small businesses, could easily fall into the trap of badly drawn mandatory arbitration agreements that ultimately end up becoming legal liabilities for them, said Edmund.

A few things that employers need to watch out for while drawing up these agreements is that the agreement provisions do not limit remedies offered to the employee or provide for steep filing fees.

Employers also cannot limit the "discovery" process, or the process an employee uses to get all the information for a fair adjudication.

"Arbitration cannot be used as a way to limit the rights of employees," said Eric Tuchman, general counsel for non-profit organization American Arbiters Association.

Tuchman suggested that employers ensure that potential employees sign the agreements only after they are given sufficient opportunity and time to understand its provisions.

Sometimes mandatory arbitration agreements can backfire against employers who want to go to the courts, especially in cases involving the non-compete clause.

"Enforcing the non-compete clause in sloppily worded agreements can be a problem during arbitration and in those cases employers would be better off going to court," said Edmund.